Laddering A Bond Portfolio Will Substantially Reduce Your Client’s Exposure To Interest Rate Volatility

Overview: Many advisers purchase bonds and bond funds as a part of their clients' comprehensive investment portfolios. They are attracted because of their perceived safety and high yields. Of course, not all bonds and bond funds are the same. Investors are consistently lured by high yields into high-risk bond strategies, only to lose principal. Laddering a portfolio requires buying and holding equal amounts of fixed-income securities designed to mature over a defined period that can range from one to 20 years. When the shortest security matures, it is replaced with a purchase of an equal amount of the longest maturity in the ladder. Laddering tends to outperform other bond strategies because it simultaneously accomplishes two goals: 1) captures price appreciation as the bonds age and their remaining life shortens, and 2) reinvests principal from maturing short-term bonds (low-yielding bonds) into new longer-term bonds (high-yielding bonds). It reduces interest rate risk because it shortens the average maturity of a portfolio and reacts to changing interest rate conditions. If one can focus on the fact that it really does not matter which way interest rates go and that one is going to get about the same return and will realize that it is always a good time to buy into a laddered portfolio.

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Format: HTML | Date: Jun 2001 | Pages: 1